EU Commission publishes emergency state aid rules in reaction to the COVID-19 outbreak

On 19 March 2020, the EU Commission published a Temporary Framework for state aid measures to support the economy in the current COVID-19 outbreak. 

1. What is covered by the Temporary Framework (TF) and how does it apply?

The TF is a soft-law document that describes how the Commission will apply the state aid rules in the context of the pandemic. 

It sets out the conditions under which the Commission will approve measures taken by member states that fall under the EU Treaty (TFEU) rules for state aid. 

General, non-selective support measures available to all companies in a member state and measures benefitting consumers rather than undertakings are not covered by the TF as they do not constitute state aid.

2. What measures taken by member states will be seen as compatible with the state aid rules?

The TF covers various types of measures, all of which will need to be notified by member states to the Commission (DG COMP). The Commission promises to clear notifications of aid schemes or individual aid measures 'very rapidly'.

First, on the basis of article 107(2)(b) TFEU ('disaster aid'), member states can compensate:

• undertakings in sectors that have been particularly badly hit by the outbreak (eg transport, tourism and culture, hospitality and retail); and/or
• organisers of cancelled events for damages suffered due to and directly caused by the outbreak. 

There are no quantum limits for this type of aid. Undertakings that have received aid in the past (such as rescue and restructuring aid) can also be supported under this rule (no 'one time, last time' principle), which is particularly relevant for airlines and, potentially, for banks.

Second, pursuant to article 107(3)(b) TFEU, the Commission may declare compatible with the internal market aid 'to remedy a serious disturbance in the economy of a member state'. 

The following four types of measures are available to member states, and can be used cumulatively to support individual sectors or companies hit by the consequences of the pandemic:

1. direct grants, repayable advances or tax advantages;
2. guarantees on loans;
3. subsidised interest rates; and
4. short-term export credit insurance.

The specific conditions that apply to each of these measures are set out in sections 3-5 below.

Member states will most likely make use of these possibilities in the form of aid schemes that need to be notified to and approved by the Commission before coming into force (eg the Danish compensation scheme for cancellation of events, SA.56685). 

DG COMP will apply the TF retroactively for measures notified as of 1 February 2020. In addition, notifications of rescue and restructuring aid measures (article 107(3)(c) TFEU) remain possible as usual.

3. What are the conditions for direct grants, repayable advances or tax advantages?

This instrument is intended to cover temporary, limited amounts of aid for undertakings that face a shortage or unavailability of liquidity. 

The Commission will consider such state aid compatible with the internal market provided that, among other things, the following four conditions are met (specific conditions apply to the agriculture, fisheries and food sectors):

1. the aid does not exceed €800,000 per undertaking in the form of direct grants, repayable advances, tax or payments advantages. All figures used must be gross, that is, before any deduction of tax or other charge;
2. the aid is granted on the basis of a scheme with an estimated budget;
3. the aid may be granted to undertakings that are not in difficulty and/or to undertakings that were not in difficulty on 31 December 2019, but that faced difficulties or entered in difficulty thereafter as a result of the COVID-19 outbreak; and
4. the aid is granted no later than 31 December 2020.

4. What are the conditions for guarantees on loans and subsidised interest rates?

The Commission will consider state aid in the form of new public guarantees on loans or subsidies to public loans compatible with the internal market on the basis of article 107(3)(b) TFEU.  

For the same underlying loan principal, aid granted in the form of a guarantee and subsidised interest rates cannot be cumulated. 

Among other things, the following conditions apply to the grant of this kind of aid (eligible beneficiaries as per list item 3 in section 3 above):

a. Guarantee premiums are set at a minimum level as set out in the table. Subsidised interest rates are at least equal to the base rate (one-year IBOR or equivalent as published by the Commission) applicable on 1 January 2020 plus the credit risk margins.

b. As an alternative, member states may notify schemes, considering the above table as a basis, whereby the maturity, pricing and guarantee coverage can be modulated (eg so that lower guarantee coverage offsets a longer maturity).

c. The guarantee or the subsidised interest loan contract is agreed by 31 December 2020 at the latest. Subsidised interest loan contracts are limited to maximum six years.

d. For (guaranteed or subsidised interest) loans with a maturity beyond 31 December 2020, the amount of the loan principal doest not exceed:

• the double of the annual wage bill of the beneficiary (including social charges as well as the cost of personnel working on the undertakings site but formally in the payroll of subcontractors) for 2019, or for the last year available. In the case of undertakings created on or after 1 January 2019, the maximum loan must not exceed the estimated annual wage bill for the first two years in operation; or
• 25 per cent of total turnover of the beneficiary in 2019; or
• with appropriate justification and based on a self-certification by the beneficiary of its liquidity needs, the amount of the loan may be increased to cover the liquidity needs from the moment of granting for the coming 18 months for SMEs and for the coming 12 months for large enterprises.

e. For loans with a maturity until 31 December 2020, the amount of the loan principal may be higher than under point (d) with appropriate justification and if proportionality of the aid remains assured.

f. In case of loan guarantees, the duration of the guarantee is limited to maximum six years and the public guarantee does not exceed:

• 90 per cent of the loan principal where losses are sustained proportionally and under same conditions, by the credit institution and the state; or
• 35 per cent of the loan principal, where losses are first attributed to the state and only then to the credit institutions (ie a first-loss guarantee); and
• in both of the above cases, when the size of the loan decreases over time, for instance because the loan starts to be reimbursed, the guaranteed amount has to decrease proportionally;

g. The guarantee or the subsidised interest loan may relate to both investment and working capital loans.

5. What are the conditions for short-term export credit insurance?

As a consequence of the current outbreak, the Commission states that it cannot be excluded that cover for marketable risks could be temporarily unavailable in certain countries. 

In this context, member states may demonstrate the lack of market by providing sufficient evidence of the unavailability of cover for the risk in the private insurance market. 

Use of state aid will therefore be considered justified if:

• a large well-known international private export credits insurer and a national credit insurer produce evidence of the unavailability of such cover; or
• at least four well-established exporters in the member state produce evidence of refusal of cover from insurers for specific operations.

6. What are the repercussions on banks and the financial sector?

The TF sets out that if disaster aid is granted to banks, then such aid does not have the objective of preserving or restoring the viability, liquidity or solvency of an institution or entity. 

As a result, such aid would not qualify as 'extraordinary public financial support' under the bank recovery and resolution directive (BRRD) or the single resolution mechanism regulation and would also not be assessed under the state aid rules applicable to the banking sector. 

The same is true of any indirect benefit for banks that are 'channelling' state aid to real economy companies under the TF (in the form of guaranteed or subsidised loans).

However, if banks were to require direct support in the form of liquidity recapitalisation or impaired asset measures, the Commission will assess whether the measure meets the conditions of Article 32(4)(d)(i), (ii) or (iii) of the BRRD (eg precautionary recapitalisation). If so, the bank receiving such direct support would not be deemed to be failing – or likely to fail. 

To the extent such measures address problems linked to the COVID-19 outbreak, they would be deemed to fall under point 45 of the 2013 banking communication, which sets out an exception to the requirement of burden-sharing by shareholders and subordinated creditors.

7. What next?

The final version of the TF provides more leeway for member states than the draft we saw on 17 March. 

Depending on how the outbreak develops, the measures foreseen may soon prove to be insufficient. 

• Will the implementation of these rules in member states be a sufficiently smooth and efficient process? 
• Is cheaper credit the right answer for struggling businesses? 
• Will banks (whose NPL ratios will go up anyway) be willing and able to take on additional risk, even if alongside a state guarantor? 

Member states and companies may have to revert more and more to individual notifications in Brussels.